Saturday, August 20, 2011

Sat. Post #2: The Greatest Trade of All Time

Excellent article from Sprott Asset Management this week that is definately worth reading.

A summary of the article:

On its way to becoming the world’s greatest superpower, the United States pulled off some truly remarkable trades. Two notable transactions come to mind and were both outstanding bargains: 1) The Louisiana Purchase (purchased from the French); 2) Alaska (purchased from the Russians).

For a mere $15 million, America instantly doubled its size with the 1803 purchase of the Louisiana territory. Sixty-fouryears later, oil-and mineral-rich Alaska was obtained for a paltry $7.2 million.

Even adjusting for inflation, the combined value of these deals in today’s dollars would be very small. However, these two transactions pale in comparison to the greatest trade of all time, one which remains ongoing. This particular trade has allowed the US to exchange more than $8 trillion worth of paper for an unbelievably enormous amount of real goods and services over 36 straight years. We’re referring, of course, to the United States trade deficit.

Imports have exceeded exports every year since 1975. For much of the past decade, America’s annual trade deficit has soared past the $600 billion mark, while the accumulated trade deficit has moved relentlessly higher.

Sprott then goes on to question how long this trade deficit can continue.

We could include countless examples and all of them collectively would not do justice to what an amazing trade this has been for the United States. Stop and think for a moment about how many hours of labour, manufactured goods and non-­renewable resources the United States has been able to acquire over 3.5 decades in exchange for paper promises.

Exporting nations have willingly financed this $8 Trillion trade deficit by accepting US dollar dominated paper promises in exchange for tangible goods sold. But perhaps most important of all, they’ve continued to hold and accumulate these paper promises rather than exchange them for real assets.

Presumably, they have done so on the belief that one day they will be able to convert these paper promises for at least an equivalent value of goods and services. This requires faith that the purchasing power of the US dollar will not decline by more than the returns of their paper promises and that someone in the future will be willing to give up a tangible asset in exchange for them.

We believe that the growing US Budget deficit, the Federal Reserve’s “Quantitative Easing” Program and the ongoing US dollar decline has caused holders of US dollar reserves to question their faith, re-­examine their desire to accumulate additional US dollar reserves and also look to convert their existing US reserves into real goods. Holders of US dollars had the chance to see how the Federal Reserve and the US Government would react to fiscal difficulties and we believe this ‘look behind the curtain’ has permanently altered their faith in US dollar denominated debt and sovereign paper promises, generally.

Foreign investors are not being properly compensated for the risk associated with holding US promises today. We believe they are beginning to realize that this exchange of real goods for paper promises is a
losing trade.

The move to diversify out of US dollar reserves by surplus generating nations may be the trigger that causes a complete revaluation of the risk associated with holding faith-­based assets generally, and we believe that holders of faith-­based will increasingly look to convert them to real assets as quickly as possible.

History has shown us that fiat based currencies always suffer the same fate and eventually become worthless. It is hard to predict exactly when people will awaken from this mass delusion in faith-­based assets. But, it is certain that in these times it is wise to avoid gambling your wealth in faith-­based assets when the system that you must trust has a clear history of being untrustworthy. We therefore advise you to question your faith and know what you own.

Interestingly... this is very similar to what Charles DeGaulle said in 1965.

2 comments:

The real reason China and Saudi Arabia among other nations buy US treasuries is because they are made an offer they cannot refuse. The offer is known among Sicilians as the Luca Brasi offer. Buy treasuries and smile knowing full well that they will not buy anywhere near the amount of real goods and oil shipped to the States. Or be unexpectedly be struck by a mag 8 earthquake or the head of State suddenly keels over with a heart attack or a war breaks out or a revolution...Gunboat diplomacy in the 21st century is the HAARP diplomacy; the Chinese don't have rocks in their heads that they would keep trading real goods for worthless paper but that HAARP offer is impossible to refuse and don't doubt for a minute that that is how business is conducted in our world today.

De Gaulle, the greatest french president of all times. Makes me sick to see Sarkozy running my country today. He wanted to sell most of the gold of the french central bank a few years ago because it was "worthless". Can't wait to get rid of him in 2012!

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